The Committee on Sale of Goods has completed its terms of reference, and submits herewith its Report on Sale of Goods.

Dr. Derek Mendes da Costa, Chairman

E. Arthur Braid

Michael G. Bridge

Diane Campbell

Ronald C. C. Cuming

Karl J. Dore

Michel Paquette

David Vaver

INTRODUCTION

At the sixty‑first Annual Meeting of the Uniform Law Conference of Canada, held in Saskatoon in 1979, the Uniform Law Section considered a report of the Ontario Commissioners on the subject of the 1979 Report on Sale of Goods (hereafter OLRC Report) of the Ontario Law Reform Commission (hereafter OLRC). The Ontario Commissioners proposed that a committee be appointed to consider the need for new, revised, uniform sale of goods legislation, and, if such a need existed, to assess the utility of the OLRC Report as the basis for such uniform law. The Uniform Law Section also considered a letter from Dr. Derek Mendes da Costa, Q.C., dated August 20,1979 written on behalf of the law reform agencies. The letter supported the proposal of the Ontario Commissioners and stressed the willingness of the law reform agencies to participate in the work of the proposed committee. The Uniform Law Section referred the matter to the Executive "for development as speedily as is practicable".

The Executive considered the matter at its meeting on August 24 1979, and requested Dr. Mendes da Costa:

1. to ascertain the Law Reform Agencies that wished to participate in the Sale of Goods Project;

2. to recommend to the Executive for appointment the names of not more than five persons representative of the participating Provinces and of the various regions of Canada to constitute a Committee to study the Draft Act attached to the Report of the Ontario Law Reform Commission on the Sale of Goods and to report thereon to the 1980 Annual Meeting of the Uniform Law Section with a recommendation for its adoption as a Uniform Act in its present form or with such changes as they considered necessary;

3. to submit a budget to the Executive for the operations of the Committee during the year 1979‑1980.

A Sale of Goods Committee was subsequently struck but with an increased membership. The members of the Committee are:

The Committee held an organizational meeting in Toronto in November, 1979, and has met since then on twelve occasions including most recently on July 28 and 29, 1981. During this period the Committee has considered every recommendation in the OLRC Report and its proposed legislative implementation at least once, and difficult or contentious issues more often. The Committee has also had the benefit of numerous memoranda on particular topics prepared by the members of the Committee and Professor Ziegel.

A. THE NEED FOR A REVISED ACT

All the common law provinces have adopted, more or less verbatim, the Sale of Goods Act 1893 (U.K.), and the Act is still in force in those Provinces.1 The United Kingdom Act has been amended in important respects2 but only one of those amendments has been adopted anywhere in Canada. Nor, for the most part, have the Provinces adopted many changes of their own. Most of the Provinces have adopted consumer protection Acts which qualify or supplement the Sale of Goods Act in important respects; but, as their names imply, their effect is restricted to consumer transactions. For the most part, non‑consumer transactions have been left untouched.3 By way of contrast, in the United States, the earlier Uniform Sales Act, which was substantially modeled on the United Kingdom Act, has been superseded by an entirely new legislative effort, Article 2 of the Uniform Commercial Code (hereafter UCC).4

Having regard to the many changes that have occurred in Canada since the adoption of the United Kingdom Act, we agree with the OLRC that there is a need for a revised Sale of Goods Act tailored to meet Canadian conditions and perceptions, and that every reasonable effort should be made to maintain uniformity among the Provinces by the adoption of a Uniform Sale of Goods Act.5 We also agree that an amended version of the Ontario draft bill commends itself for this purpose. We have prepared such an amended draft Act and submit it herewith for adoption by the Uniform Law Conference as the Uniform Sale of Goods Act 1981. Part II of this Report contains an annotated version of our draft Act. The annotations explain what changes, if any, were made to the corresponding provisions of the Ontario draft bill, and why. The Table of Concordance, following the Table of Contents at the beginning of our draft Act, also shows what changes were adopted in the organization of the sections and their numbering.

We devote the balance of this Introduction to a brief review of the most important changes made by us to the Ontario draft bill.

B. SALIENT FEATURES OF CHANGES TO ONTARIO DRAFT BILL

I. Basic Behavioural Norms: Good Faith and Unconscionability

Ontario bill, s. 3.1, like the existing provincial Acts, permits the parties to vary or exclude altogether their rights and duties arising by implication of law. In the Ontario bill, however, the power to vary or exclude does not extend to the obligations of good faith, diligence,

reasonableness and care prescribed by the Act. The Committee agrees that, in a modern milieu, minimum benchmarks of decent contractual behaviour must be maintained, but the Committee was concerned about the broad reach of the good faith requirement in Ontario bill, s. 3.2.6 Some members felt that it could affect the exercise of every right and obligation of the parties and expose it to ex post facto review and potential attack. Whether this would have happened in practice is debatable (and even more debatable is whether such attacks would have succeeded). The Committee agreed, however, that the scope of s. 3.2 should be confined to the "performance" of a duty created by the contract or the Act, good faith itself being defined in s. 1.1(1)15 (as before) as "honesty in fact and the observance of reasonable standards of fair dealing".

The Committee made only minor changes to the powers conferred on the courts in Ontario bill, s. 5.2, to police unconscionable bargains or manifestly unfair terms contained in a contract. We agree with the OLRC7 that such an explicit power is preferable to the covert tools frequently used by Canadian courts and that, outside the area of disclaimer clauses, the common law jurisprudence is still too meagre and haphazard to be an adequate substitute for a statutory enunciation of the applicable rules. We recognize that several of the Provinces have now adopted business practices and trade practices legislation to deal with contractual abuses in the consumer area, and that at least two provinces (Ontario and Manitoba) are considering more comprehensive unfair contract terms legislation. In our view, there is no justification for restricting the courts' reviewing power to consumer contracts and, in the interests of uniformity, the unconscionability provisions should be retained in the Act until such time as a majority of the Provinces have adopted general unconscionability legislation.

II. Formational Issues

Unlike the present provincial Acts, the Ontario bill contains a substantial number of provisions dealing with the formation, assignment and modification of contracts of sale. We support this attempt to modernize some basic contractual rules but feel that some amendments are desirable to the following provisions appearing in the Ontario bill.

1. Conflicting Writings and "Battle of the Forms" : UCC2‑207 deals with this difficult topic which has been much litigated in the United States. The OLRC felt that the section raises too many problems of construction to make it entirely suitable for adoption, and that only subs. (3) should be adopted in Ontario. Ontario bill, s. 4.2(3), accordingly provides:

(3) Conduct by both parties which assumes the existence of a contract is sufficient to establish a contract of sale although the writings or other communications of the parties do not otherwise establish a contract, and in such a case the terms of the contract consist of those terms on which the parties have agreed together with any supplementary terms incorporated under any provision of this Act.

It was the Committee's view that this solution was too rigid and might lead to undesirable results. We have therefore replaced s. 4.2(3) with two new provisions. First, s. 4.2(3) of the draft Act provides that a reply purporting to be an acceptance of an offer shall be treated as an acceptance, even though the reply contains additional or different terms, if the changes "do not materially alter the terms of the offer". Secondly, and more importantly, new s. 4.3 deals with the situation, corresponding to UCC 2‑207(3), where one or other party has proceeded with performance of the contract even though the parties' communications do not show mutual assent to a single set of contractual terms. In such circumstances, the court is invested with broad powers to deal with the conflicting terms if it concludes that "having regard to all of the circumstances, the one party, by his conduct in receiving or shipping the goods or otherwise, has not in fact assented to conflicting terms of the other party and that it would be unreasonable to hold such parties to such terms" (s. 4.3(2)).

2. Parol Evidence Rule. We agree with the conclusion in the OLRC Report, pp. 110‑17, that the parol evidence rule, as traditionally interpreted, should cease to apply in contracts of sale and that a court should be free to hear all relevant evidence to determine the terms of the bargain struck between the parties. A similar conclusion, in a wider setting, was reached in a subsequent report by the British Columbia Law Reform Commission.'

We feel, however, that Ontario bill, s. 4.6, which gives effect to the OLRC recommendation, is too compressed and that the effect of abolishing the parol evidence rule should be spelt out more fully. Accordingly, s. 4.8 of the draft Act provides:

4.8 No rule of law or equity respecting parol or extrinsic evidence and no provision in a writing shall prevent or limit the admissibility of evidence to prove the true terms of the agreement, including evidence of any collateral agreement or representation, or evidence as to the true identity of the parties.

Section 4.8 does not mean of course that a court must always ) or even most of the time ) accept the parol evidence when it varies or conflicts with the written terms. It means simply that the court may admit it and may take it into consideration in determining whether the writing was intended by both parties to be the exclusive expression of their agreement.

(3) Binding Character of Modifications without Consideration. An important aspect of the Ontario bill's attempt to liberalize some of the existing rules of consideration is the provision, in its s. 4.8(1), that an "agreement in good faith modifying a contract of sale needs no consideration to be binding". Some members of the Committee felt keenly that a promise "not paid for" should be enforceable only to the extent that it has actually been relied upon; until such time a party should be free to withdraw from the executory portion of such an agreement and revert to the terms of the original contract after giving reasonable notice to the other party. We accepted this argument and a provision to this effect now appears in s. 4.10 of the draft Act.

III. Warranty Provisions

1. Definition of `Express Warranty': The existing distinction in sales law between contractual and non‑contractual representations, the one amounting to a warranty and the other not, has been a source of recurring difficulty because of the problem of devising a satisfactory test to distinguish between them and because of the inadequate remedies available under existing law for a non‑contractual representation. The OLRC Report favoured adopting the reliance test in s.12 of the American Uniform Sales Act as the definition of an express warranty, and this was done in Ontario bill, s. 5.10. The OLRC Report recognized, however,9 that this expanded definition could give rise to undesirable results in the case of representations by private sellers (or buyers), but eventually decided to defer the whole question of damages claims in private sales for consideration by the OLRC in its Law of Contract Amendment Project. The Committee agrees with the soundness of the reliance test (though not where the representation clearly amounts to a term of the agreement), but we also felt that the question of remedies had to be addressed. Our solution will be found in s. 9.19(1)(b) of the draft Act, which confers a broad remedial discretion on the court with respect to a breach of warranty "not amounting to a term of a contract". In such a case, the court may grant one or more of the following remedies: rescission, reduction in the price, and damages. In considering which of these remedies to exercise the court may take into account such factors as:

(a) the fact that both persons are merchants or that one or neither is a merchant;

(b) whether the person giving the warranty or contractual undertaking purported to have knowledge or expertise, or, as the other party knew, was merely transmitting information derived from another source;

(c) whether the person giving the warranty or contractual undertaking was negligent; and

(d) any other relevant circumstance.

The net result, it will be seen, is to retain a substantial measure of difference between contractual and non‑contractual warranties, but one which gives the court much greater remedial flexibility than is possible under existing law.

2. Manufacturers' Liability for Breach of Express and Implied Warranties. The Committee also experienced some difficulty with Ontario bill, s. 5.18. It is a commonplace that under the existing law a buyer, not in privity with the manufacturer, experiences great difficulty in holding the manufacturer liable for defective goods even though it is the manufacturer who normally advertises and creates the market for them. Of course, the buyer has his recourse against the person (usually a retailer) from whom he bought the goods, but this may avail him little if the immediate seller is judgment proof or has gone out of business. Moreover, the retailer may have similar difficulties in obtaining satisfaction from the manufacturer if he bought the goods, not from the manufacturer, but from an intermediate distributor.10

Where the manufacturer advertises directly to the public, a member of the public may have redress under the doctrine of collateral warranty. Section 5.10 of both the Ontario bill and the draft Act gives statutory legitimacy to the doctrine. However, this still leaves a large gap. Ontario bill, s. 5.18, provides that the express and implied warranties of "a prior seller", and any remedies for breach thereof, enure in favour of a subsequent buyer who suffers injury because of a breach of the warranty. Section 5.18(4) goes on to provide that the measure of damages recoverable by a subsequent buyer shall be no greater than the damages that the immediate buyer could have recovered from such a prior seller, if a successful claim had been brought against the immediate buyer for breach of the same warranty and the immediate buyer had made a claim over against the prior seller. Section 5.18 was only put forward by the OLRC for purposes of discussion." The OLRC made no recommendations concerning its enactment.

The Committee also debated the wisdom of including such a provision in the draft Act. Some members of the Committee felt the whole problem was best left to be dealt with in the context of consumer product warranties legislation. Other members were concerned that only a minority of the Provinces have so far adopted consumer product warranties legislation and that there was little evidence that the remaining Provinces were in a hurry to follow the lead of Saskatchewan, New Brunswick, and Quebec. It was also pointed out that Lambert v. Lewis" showed that privity problems were not confined to consumer sales, and that it would be anomalous if a modern sales Act failed to acknowledge, however modestly, one of the most pressing problems in this branch of the law. It was these latter arguments that ultimately prevailed and, as a result, the Committee decided to retain s. 5.18 in an amended form as a fully fledged section in the draft Act. However, in the draft Act the section is restricted by subs. (1)(d) to cases where the prior seller is a merchant who sells goods that are subsequently resold Ontario bill, s. 5.18(5), which in effect made the section non. excludable, has been omitted, thus subjecting such a disclaimer to the usual test of unconscionability.

IV. Special Property and Insurable Interest

Following the UCC precedent, the Ontario bill has eliminated title issues as a factor in determining the rights and duties of buyer and seller vis‑a‑vis one another." In partial substitution, Ontario bill, s. 7.1, adopts the UCC concept of the buyer's special property and insurable interest, both of which arise by identification of existing goods to the contract. The insurable interest speaks for itself. "Special property" is a relevant connecting factor in Article 2 for the purpose of allowing the buyer to claim goods in the hands of an insolvent seller that have been paid for (UCC 2‑502) and to bring an action in tort against third parties for injury to the goods (UCC 2‑722). The OLRC decided that neither section was suitable for adoption in the Ontario bill. 14 In view of this conclusion, the question to which the Committee addressed itself was whether or not special property still serves a useful purpose. The Committee was especially troubled by the case of the buyer of identified goods who has paid all or part of the price, but has not received delivery of the goods because of the seller's insolvency. It felt that endowing the buyer with a special property may still assist him in obtaining the goods and in bringing tortious claims against third parties even before he has received the full title to the goods. The Committee therefore decided that both aspects of s. 7.1 should be retained. It also felt that the buyer's special property was a relevant factor for the court to consider in an action for special performance, and the draft Act so provides in s. 9.20(2).

V. Excuse for Failure of Presupposed Conditions

An important group of provisions in Part VIII of the Ontario bill ss. 8.13 to 8.17) deals with the effects of unforeseen circumstances on the parties' obligations. The Committee's changes here were of a twofold character. First, the sequence of the sections was arranged in a more logical pattern." Secondly, the scope of s. 8.12 of the draft Act, which corresponds to Ontario bill, s. 8.13, was narrowed somewhat. Both sections deal with the effect on the contract of an attempt to sell non‑existing goods and with cases where casualty is suffered by the goods subsequent to the conclusion of the contract. The point was made that, since s. 7.7 operates to preserve bargains where the goods are non‑conforming, it would be consistent with this approach for the dispensing power in s. 8.12 to be as narrow as reasonably possible for goods damaged or destroyed before delivery. Accordingly, s. 8.12(3) of the draft Act provides that Rules 1 and 2 of subs. (1) do not apply where "the seller is able to tender performance that differs in no material respect from that agreed on".

VI. Remedies for Breach

1. Doctrine of Substantial Breach. No single issue provoked livelier discussion within the Committee than the question of what type of breach should be sufficient to entitle a buyer to reject non‑conforming goods and either party to cancel the contract for breach by the other. The OLRC Report, deviating from the perfect tender rule in UCC Article 2, adopted the position that only a "substantial breach", defined in Ontario bill, s. 1.1(1)24, should justify such strong remedies. 16 Ontario bill, s. 7.7, further qualified the right to cancel by conferring on the seller a broad right to cure even a substantial breach where this could be done without unreasonable prejudice to the buyer. The Committee felt that these provisions were too complex and perhaps too generous to the seller. It favoured a "perfect tender" rule with respect to the seller's obligations and the buyer's right to reject, coupled with substantially the same right to cure as under the Ontario bill. A similar regime has also been adopted with respect to breaches by the buyer although, in the nature of things, the buyer's right to cure in such cases is much more simply described." In the Committee's view, the effect of these changes is to reach a result not dissimilar from that of the Ontario bill but by a more direct route. There are two important exceptions to the strict performance rule. In the case of installment contracts (s. 8.10) and in cases of anticipatory repudiation (s. 8.8), only a substantial or total breach will confer a right to cancel the contract. The Committee is of the view that these revised provisions will have two salutary effects. First, they will encourage a performing party to take his duties seriously since he will not be able to shelter behind the confident belief that a minor breach can lead only to a damages claim. A reduction in the price may indeed be an appropriate remedy under the new provisions (e.g., for the delivery of non‑conforming goods) but the burden will be on the seller to show this, and he will have a strong inducement to make his offer promptly. The second salutary effect will be that, where a breach has occurred, the parties will be obliged to negotiate a settlement in faith since neither party will enjoy absolute rights.

2. Rejection and Revocation of Acceptance. "Revocation of acceptance" is the term used in the UCC and in Ontario bill, s. 8.8, to describe the right of a buyer to reject non‑conforming goods even after he is deemed to have accepted them. The OLRC Report" considered the possibility of collapsing the distinction between rejection and revocation of acceptance, but concluded it was not feasible in view of the important role reserved for acceptance (narrowly defined) in the Ontario bill in determining when the seller is entitled to sue for the price. For reasons that are explained below, the Committee reached the conclusion that the link between acceptance and entitlement to price should be severed so that this obstacle to eliminating the distinction has been removed. However, the Committee still thought acceptance a useful and familiar concept for other purposes and decided to retain it (see s. 8.2 of the draft Act). What the Committee has done instead is to expand the concept of acceptance so as to merge rejection and revocation of acceptance. This was possible because, under s. 8.2(2) of the draft Act, mere lapse of time no longer amounts to acceptance (as it is under the existing law and under the Ontario bill), except where (i) the buyer knew or ought to have known of the non‑conformity, (ii) the goods are no longer in substantially the condition in which the buyer received them, or (iii) the non‑conformity is of a minor character. Apart from this change, the sequence of the sections in Ontario bill, ss. 8.2 to 8.8, has been rearranged and their number reduced by two by consolidating several of the provisions.

3. Seller's Right to Price. As already mentioned, under Ontario bill, s. 9.11, following UCC 2‑709, the seller is entitled to recover the price only where the goods have been accepted by the buyer or where one of the other enumerated exceptions applies. The Committee was of the view that the acceptance test was a little too severe and might result in a seller having to take back goods that had already been shipped to the buyer. It preferred instead a "delivery" test as the touchstone of the seller's entitlement to the price. This is the test adopted in s. 9.11(1)(a) of the draft Act. "Delivery" for this purpose is defined in subs. (4). The seller also retains the right to sue for the price in the same circumstances as under the Ontario bill, viz., where at the material time the goods were at the buyer's risk or where the seller can show that there is no alternative market for the goods.

4. Remedies Common to the Parties. The Ontario bill, following the existing provincial Acts and the structure of part VII of UCC Article 2, treats separately the seller's and buyer's claim for damages. In a search for greater economy of language and a desire to avoid the unnecessary repetition of provisions, the Committee decided to combine several of the damages provisions in what is now s. 9.18 of the draft Act. The Committee also thought it desirable to include in s. 9.18(3) a specific reference to the aggrieved party's duty to mitigate his damages.

5. Damages in Private Sales. As previously mentioned, the OLRC Report considered this a generally neglected branch of sales law but ultimately decided that the question should be referred, in a broader setting, to its Law of Contracts Amendment Project. The Committee was of the view that something should be done now, and that the right solution was to give the court the same discretion to vary the remedy or substitute other remedies as it has in the case of a breach of warranty not amounting to a term of the contract of sale (see s. 9.19(1)(a)). Reference was made earlier to s. 9.19(2), which lists some of the factors to be taken into consideration by the court in determining whether or not to exercise its discretion.

6. Specific Performance. In addition to the change involving the relevance of the buyer's special property in the goods, only one significant alteration has been made to the provisions in Ontario bill, s. 9.18. Section 9.20 of the draft Act covers suits by a seller as well as a buyer. The change was made because the Committee felt there may be circumstances‑as, for example, in requirement and output contracts and in situations involving third party contracts" ‑where damages may not be an adequate remedy to an aggrieved seller. Of course, the remedy itself remains discretionary, as is true under the existing law and under the Ontario bill.

C. DOCUMENTS OF TITLE

"Documents of title" is a term that appears frequently in the draft Act," and necessarily so, to describe the rights and obligations of the parties under a contract of sale and in the context of the exceptions to the nemo dat rule. The draft Act also distinguishes between negotiable and non‑negotiable documents of title."

The OLRC was of the view that the Ontario law of documents of title was badly fragmented, not always consistent, and incomplete in important respects, and it recommended that the Ontario law be comprehensively examined with a view to its systematic codification.22 The Commission also recommended that Article 7 of the Uniform Commercial Code should be considered with a view to determining its suitability for adoption in Ontario.

The Committee fully endorses the sentiments of the OLRC and believes them to be as relevant to the position in the other common law Provinces as they are in Ontario. The Committee is particularly concerned that there is no proper common law or comprehensive statutory basis for distinguishing between negotiable and nonnegotiable documents of title, although the distinction is a vital one for the purposes of the draft Act. We therefore recommend, as a matter of some urgency, that the Uniform Law Conference establish a committee to review the existing federal and provincial law and to make recommendations with respect to the adoption of a Uniform Documents of Title Act.

D. CONCLUSION

It is always hazardous to generalize about a draft Act as complex as the present one. It would be fair to conclude, however, that certain themes are pervasive throughout much of the draft Act, which generally favours flexibility, reasonable conduct, and an enlarged scope for the exercise of judicial discretion in difficult situations. In adopting this approach or, more accurately, in pursuing and adapting an approach already very evident in the Ontario bill, the Committee has not lost sight of the importance of certainty and predictability in commercial transactions. It believes, however, that the certainty is often illusory and that in daily practice sellers and buyers themselves adopt the same attitude of flexibility and reasonableness that the draft Act seeks to promote.